Interest-bearing stablecoin YLDS approved, opening a new era of stablecoin yields

The U.S. Securities and Exchange Commission (SEC) recently approved the first interest-bearing stablecoin YLDS launched by Figure Markets. This move not only indicates that U.S. regulators have an open attitude towards innovation in crypto finance but also suggests that stablecoins are transitioning from mere payment tools to compliant yield-bearing assets. This could open up broader development space for the stablecoin sector, making it another innovative field capable of attracting large-scale institutional funds after Bitcoin.

Reasons for SEC Approval of YLDS

In 2024, a well-known stablecoin issuer achieved an annual profit of up to $13.7 billion, surpassing traditional financial giants (approximately $12.9 billion). This profit mainly came from the investment income of reserve assets (primarily U.S. Treasury bonds), but it was unrelated to the holders, and users could not obtain asset appreciation and investment returns through the stablecoin. This is precisely the market opportunity that interest-bearing stablecoins are targeting.

The core of interest-bearing stablecoins lies in the "redistribution of asset income rights". In the traditional stablecoin model, users sacrifice the time value of their funds for stability. However, interest-bearing stablecoins can maintain stability while allowing holders to directly enjoy the income by tokenizing the income rights of the underlying assets. More importantly, interest-bearing stablecoins address the pain points of the "silent majority": although traditional stablecoins can also generate income through staking, the complex operations and security compliance risks hinder large-scale user adoption. Stablecoins like YLDS, which allow "holding coins to earn interest", make capital income accessible without thresholds, achieving "democratization of income".

Although sharing the underlying asset returns will reduce the profits of the issuing institution, it has greatly enhanced the attractiveness of interest-bearing stablecoins. Especially against the backdrop of current global economic instability and high inflation levels, both on-chain users and traditional investors have an increasing demand for financial products that can generate stable returns. Products like YLDS, which are both stable and can provide returns far exceeding traditional bank interest rates, will undoubtedly become favorites among investors.

However, the key to SEC approval of YLDS lies in its avoidance of the core regulatory controversies, making it compliant with current U.S. securities laws. Since a systematic regulatory framework for stablecoins has not yet been established, the regulation of stablecoins in the U.S. primarily operates under existing laws. Different regulatory agencies have varying definitions of stablecoins, all vying for regulatory dominance. This has led to a chaotic situation in U.S. stablecoin regulation, making it difficult to reach a basic consensus. YLDS, as a yield-generating interest-bearing stablecoin, has a structure similar to traditional fixed-income products, and even under the current legal framework, it clearly falls under the category of "securities," which is not disputed. This is a prerequisite for YLDS to be included under SEC regulation.

The approval of YLDS indicates that the U.S. regulatory attitude towards cryptocurrencies continues to improve, with regulatory agencies actively adapting to the rapidly developing stablecoin and crypto financial markets. The regulation of stablecoins has also shifted from "passive defense" to "active guidance." However, this cannot change the regulatory challenges faced by traditional stablecoins in the short term, and more changes will have to wait for Congress to officially pass the stablecoin regulatory bill. The industry generally expects that the U.S. stablecoin regulatory bill may gradually be implemented within the next 1 to 1.5 years.

YLD distributes the interest income of underlying assets (mainly U.S. Treasury bonds, commercial papers, etc.) to holders through smart contracts, and binds the income distribution to compliant identities through a strict KYC verification mechanism, reducing regulatory concerns about anonymity. These compliance designs provide references for similar projects seeking regulatory approval in the future. In the next 1-2 years, we may see more compliant interest-bearing stablecoin products, prompting more countries and regions to consider the necessity of developing and regulating interest-bearing stablecoins. For regions that have already implemented stablecoin regulations and regard stablecoins as payment tools, when facing interest-bearing stablecoins that clearly possess securities attributes, in addition to adjusting the existing regulatory framework, it may also be worth considering restricting the types of underlying assets for interest-bearing stablecoins, thus bringing them under the regulation of tokenized securities.

The Rise of Interest-earning Stablecoins Will Accelerate the Institutionalization of the Crypto Market

The SEC's approval of YLDS not only demonstrates the current openness and friendliness of U.S. regulation but also indicates that in the mainstream financial context, stablecoins may evolve from "cash substitutes" into a new type of asset that embodies both "payment tools" and "yield tools," thereby accelerating the institutionalization and dollarization process of the cryptocurrency market.

Traditional stablecoins, while meeting the needs of crypto payments, are mostly used by institutions as short-term liquidity tools due to the lack of interest income. In contrast, interest-bearing stablecoins not only generate stable returns but also enhance capital turnover through intermediary-free and round-the-clock on-chain transactions, providing significant advantages in capital efficiency and instant settlement capabilities. A well-known investment institution pointed out in its latest annual report that hedge funds and asset management institutions have begun to incorporate stablecoins into their cash management strategies, and once YLDS is approved by the SEC, it will further alleviate institutional compliance concerns and elevate the acceptance and participation of institutional investors in such stablecoins to new heights.

The large-scale influx of institutional funds will further drive the rapid growth of the interest-bearing stablecoin market, making it an increasingly indispensable part of the crypto ecosystem. Analysis firms optimistically predict that interest-bearing stablecoins will experience explosive growth in the next 3-5 years, capturing about 10-15% of the stablecoin market, becoming another category of crypto assets that can attract significant institutional attention and investment following BTC.

The rise of interest-bearing stablecoins will further consolidate the dominance of the US dollar in the crypto world. Currently, the sources of yield for interest-bearing stablecoins on the market mainly fall into three categories: through investing in US Treasuries, blockchain staking rewards, or structured strategy yields. Although a certain synthetic US dollar stablecoin is expected to achieve great success in 2024, becoming a major player in the interest-bearing stablecoin market, it does not mean that staking and structured strategies as sources of yield will become mainstream. On the contrary, we believe that interest-bearing stablecoins backed by US Treasuries will still be the preferred choice for institutional investors in the future.

Although the physical world is accelerating the process of de-dollarization, the digital on-chain world continues to gravitate towards the US dollar. Whether it's the large-scale adoption of dollar stablecoins or the wave of tokenization driven by Wall Street institutions, the influence of dollar assets in the cryptocurrency market is continuously strengthening, and this trend towards dollarization is being reinforced.

The likelihood of a short-term reversal of this trend is low, because from the perspectives of liquidity, stability, and market acceptance, there are currently no more alternatives for tokenized innovation and the crypto financial market other than dollar assets represented by U.S. Treasuries. The SEC's approval of YLDS further indicates that U.S. regulatory agencies have now signaled a green light for interest-bearing stablecoins related to U.S. Treasuries, which will undoubtedly attract more projects to launch similar products in the future. This is also why, despite knowing that the yield model of interest-bearing stablecoins will certainly become more diversified in the future, with reserve assets potentially expanding to more types of physical assets such as real estate, gold, and corporate bonds, we still believe that U.S. Treasuries, as a risk-free asset, will continue to dominate the underlying asset pool of interest-bearing stablecoins.

Conclusion

The approval of YLDS is not only a compliance breakthrough in crypto innovation but also a milestone in the democratization of finance. It reveals a simple truth: under the premise of controllable risk, the market's demand for "money making money" is eternal. With the improvement of regulatory frameworks and the influx of institutional funds, interest-bearing stablecoins may reshape the stablecoin market and enhance the dollarization trend of crypto financial innovation. However, this process must also balance innovation and risk to avoid repeating past mistakes. Only in this way can interest-bearing stablecoins truly achieve the goal of "allowing everyone to earn money effortlessly."